September 26, 2016 / 10:02 PM / 2 years ago

Canada's lagging growth pressures policymakers to add stimulus

TORONTO, Sept 26 (Reuters) - Canadian policymakers are facing increased pressure to support the country’s lackluster economy as infrastructure spending takes time to kick in and record high debt loads dampen the impact of stimulus cheques.

Weak oil prices, disappointing growth in non-energy exports and a wildfire in Alberta that cut oil production have all weighed on Canada’s economy this year, offsetting fiscal stimulus measures to support the economy.

“The Canadian economy needs more stimulus ... fiscal, monetary, structural,” said David Watt, chief economist at HSBC Bank Canada.

Canadian growth this year is less robust than the government initially expected, Finance Minister Bill Morneau said on Monday, adding that the government will look at what more it might do. The government typically provides a fiscal update in November or December.

The fall update would be a reasonable time to bring forward fiscal spending if good projects have been identified, said Doug Porter, chief economist at BMO Capital Markets.

But he added that is a big “if.”

The government projected in March a C$29.4 billion ($22.2 billion) deficit, including payments to some parents with young children and a plan to increase infrastructure investment to C$120 billion over 10 years.

“It seems to be getting delayed in terms of that (infrastructure) expenditure occurring,” said Paul Ferley, assistant chief economist at Royal Bank of Canada.

Increased child benefit checks arrived in households in July, but appeared to have little impact on retail sales for the month.

Elevated household leverage could leave Canadians more reluctant to spend that extra income, said Robert Both, macro strategist at TD Securities, who expects transfer payments and tax cuts to add just 0.1 of a percentage point to growth in 2016.

Historically low interest rates have encouraged Canadians to take on more debt, with household debt as a share of income reaching a record high 167.6 percent in the second quarter.

The probability of a Bank of Canada interest rate cut by the middle of next year jumped to 50 percent following recent weak inflation data.

Additional income could be used to pay down debt which “will limit just how much of a bounce in growth we see,” RBC’s Ferley said.

A housing market boom has helped Canadians refinance their mortgages to support spending while adding to debt levels.

If house prices decline it could further dampen the impact of the stimulus, said Krishen Rangasamy, senior economist at National Bank Financial. ($1 = 1.3224 Canadian dollars) (Reporting by Fergal Smith, editing by G Crosse)

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